Fpl Case

FPL Case

1. Why do firms pay dividend? What, in general, are the advantages and disadvantages of paying cash dividends?

Dividend payout is important to the firm because dividends provide certainty about the company's financial well-being. In addition, dividends are also attractive for investors looking to secure current income, thereby securing more capital for the firm (injected funds by investors)

Furthermore, by increasing or decreasing dividend payout, it can affect the price of a security. For example, companies that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions; however, these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends. Even without a dividend history, companies will be viewed favourably when they issue new dividend payouts.

Also, firms pay dividends to eliminate/reduce agency problems when they have excess earnings.

Advantages of cash dividend payment:

* Cash dividends provide a steady source of income for investors and can be used by investors to reinvest in the company, if desired.

* It allows investors to enjoy the financial benefits of owning the company’s stock without having to sell the stock. In turn, this will help to promote long-term ownership of the stock.

* Cash dividends help investors to limit losses in the event of sudden bankruptcy. This is because the investor would have acquired cash payouts rather than losing all his money when the company goes bust.

* Cash dividends can underscore good results and provide support to stock price

Disadvantages of cash dividend payment:

* Cash dividend payouts are taxed when received by shareholders. This may in turn lower the value of the payouts which investors may not prefer.

* Cash dividends reduces the company’s liquidity position and may affect its ability to take on positive NPV projects when...